The impact of terrorism on financial markets

Purpose - The paper seeks to draw lessons for effective policy and regulatory responses to protect financial systems in the face of terrorist attacks. Design/methodology/approach - The paper presents data on the reaction of financial markets to the terrorist attacks in New York (2001) and Madrid (2004). It describes the authorities' crisis management responses and analyses their effectiveness. The paper describes the subsequent regulatory responses to protect the financial systems from abuse by terrorists. Findings - Diversified, liquid, and sound financial markets were efficient in absorbing the shocks of terrorist attacks when supported by well organized crisis management responses. Research limitations/implications - The paper is limited in its coverage to the reaction of the financial markets to the 11 September 2001, terrorist attacks in New York, and 11 March 2004, attacks in Madrid. Practical implications - The paper highlights the importance of effective contingency planning by the authorities and financial firms in mitigating the risks of disruption from terrorist attacks. Originality/value - This paper provides an overview of the issues, challenges and responses in dealing with the risks posed by terrorism to financial systems. It combines empirical evidence with an institutional perspective, and notes some of the regulatory challenges in combating terrorist finance.